How to Find Funds to Launch a Franchise

The number one reason for the failure of franchisors is under-capitalisation. If you’re thinking about franchising, it’s important that you have enough capital to launch and enough capital to sustain the operation until recurring royalties can cover your overhead.

Many franchisors wrongly assume that the amount they collect from selling franchises in initial franchise fees will cover overheads. But often the franchise fee revenue does not fund the necessary infrastructure, leaving the emerging franchisor scrambling. If you’re not sitting on a at least R2 million, you may run out of cash.

Getting Started

When launching my healthcare staffing franchise in 2005, we estimated we needed to invest R3 million. I contributed R1 million of our own money and accessed R2 million in debt financing. We were about 18 months in when the cash began to get painfully tight.

We had overspent on unnecessary or ill-advised hiring: at least R800 000 on legal and public relations firms; R400 000 for salaried employees to do work that contracted consultants could have done, particularly franchise training; and between R400 000 and R600 000 for outside help in the first year to handle franchise sales when that role really belonged to my husband or me. We actually needed R5 million.

Add up what we overspent on though, and you see that our initial estimate of R3 million would have been adequate if we had known then what we know now. While you might avoid similar pitfalls, you should still plan on R800 000 in additional cash reserves, over and above what your financial model shows you need, for unexpected expenses. Once you’ve figured out a realistic estimate for your opportunity, the next part is pursuing the funds. Here’s a look at the most common sources.

1. Banks. The capital markets have gotten tighter, but there is still money available. Banks review lots of requests, and they are going to be more inclined to loan to those who make their job easier by anticipating their concerns.

In our first business plan for franchising, we intended to sell ten franchises in the first year, another 25 in the second year, 40 in the third year, and about 50 each year in the fourth and fifth years. Naturally, the bank questioned how we would sell ten franchises in a year without any experience. But we had thoroughly researched our competitors and were prepared to convince the bank that we could meet our goal.

These days, you might need to pitch to multiple banks before finding a lender. You will need great market research on your industry and your performance compared with peers. You must exert strong confidence in your abilities to achieve your business-plan goals and to repay the loan. And you will need to have skin in the game. Expect to give a personal guarantee for the loan.

So be prepared before you meet with the bank. Make sure your package includes the following: a full business plan; financial statements for the first five years, including a statement of cash flow; and the competitive analysis on your industry to show that your assumptions for unit sales by year, royalty revenue per year and per unit, and earnings as a percentage of revenue are within the ranges of what has occurred historically in the industry.

2. Government programmes. I scoured all the possible government programmes, concentrating on ones that were available to me and sure enough, I found one that suited me. You’ll be amazed by the number of resources that are out there, but remember, government programmes have specific mandates, so choose the ones that suit what you have to offer.

3. Friends and family. Remember how I underestimated the money we needed by R2 million? That was a hard moment. We had to access more capital and really build, or entrench and stall growth. At that point, we had 12 franchisees who had signed up because of their belief in our vision. So we tabled our pride and asked my husband’s parents, my parents and extended family for a loan.

They agreed to help us. We structured the one-year loan with 14% interest (to match their returns in the market, since they had to pull out the money to loan to us). We were able to pay it back in 11 months. We will always be grateful that they stood by us. Receiving financial help from family members is humbling and is something that stays with you, grounds you, and drives you to never have to repeat the experience.

Growing A Successful Trappers Franchise Into A R300 Million Business

When Grant Ponting took over the Trappers franchise in 2003, he faced one overriding challenge: 16 franchisees who were used to doing things their own way. To build a strong, cohesive group geared for growth, he needed to win their trust and prove that business is better when you work together. Today, Trappers has 34 stores and a turnover of R300 million. Here’s how.

Vital Stats

Every business has strengths and weaknesses. Successful companies learn to recognise and mitigate their weaknesses, while building on their strengths.

When Grant Ponting and his brother Mark bought the Trappers franchise group in 2003, their first priority was to determine the business’s strengths and weaknesses, and what it would take to build a strong cohesive franchise group.

At the time, Trappers’ turnover was R25 million with 16 franchised stores. Today, it has 34 stores and a turnover of R300 million. Not only has the number of stores doubled, but average store turnover has quadrupled.

This didn’t happen overnight. It took careful planning, patience, building up trust and delivering on promises — and above all it required clear and focused goals.

Finding the strength in weaknesses

Both Grant and Mark were familiar with the Trappers brand before they invested in it. Having grown up in Nelspruit and attended university in Kwa-Zulu Natal, they knew the Pietermaritzburg and Nelspruit stores, and their owners. It was a strong brand that filled a niche in farming communities, but it didn’t have a retail footprint in larger South African cities.

“My family were consulting for the Nelspruit store,” explains Grant. “The business had three separate shareholders. The franchised stores were loosely affiliated, with no strong head office system guiding the brand’s strategy or overall positioning.

“We believed that the brand had legs, and that we could leverage its strong heritage and grow it beyond 16 stores through a franchise model,” he says. “We realised that we may lose stores who did not buy into our vision at the time, but we also knew that making these necessary changes at that time was critical for the business to grow.”

“One of the strengths of the brand was how well each store owner knew and engaged with their community,” says John Black, who bought shares in the business in 2011. “These were community stores run by entrepreneurially-minded people. But they were not used to being told what to do by a brand head office.

“All 16 stores operated independently. Our goal was to centralise the company, create a clear strategy and disseminate it to our franchisees, bringing all the benefits of a franchise with it, including economies of scale.”

Developing relationships with your franchisees

The idea seemed simple. The reality was not. “There was pushback,” says Grant. The store owners Grant and John were attempting to woo to their way of thinking hadn’t joined a fully formed franchise. “They were there because they were good entrepreneurs. We needed to use that, not fight it; that’s what had brought the brand to where it was, and we liked the brand. But we also knew that any real growth would only come if we were able to forge a strong, unified franchise business.”

The very thing that gave Trappers its strength was also the biggest barrier to its growth as a brand. “We knew we needed to win them over. They had to trust us if this was going to work. If we could harness their entrepreneurial spirit and also create a consistency in the brand and its offering, we’d build an incredibly strong business.”

Grant and John’s mission was simple: Find a way to create a balance that encouraged individual store owners to take guidance, input and leverage what head office put in place but still maintain their individual, entrepreneurial spirits, running competitively in their towns, understanding their markets, and responding to local needs.

“We lost a few at the beginning. Some because the model was never going to work for them. Others because we recommended they de-franchise their stores. We were too far away from them, and didn’t believe we could give them proper support while we were consolidating the business. It was in both of our best interests to part ways,” says Grant. “We also knew that those remaining would have our full support.”

Building trust

They needed to convince their franchisees that their strategy and credibility would change each store owner’s business for the better.

“We started by providing them with exclusive product ranges via a head office-owned wholesale business, in addition to exclusive deals and product ranges in partnership with key suppliers to the group,” says John. Today, John heads up the retail operations of the business.

“As the business grew, the group was not only achieving better pricing, but opportunities to expand into exclusive ranges presented themselves more regularly, which in turn resulted in the development of a centralised merchandising and IT model,” explains Grant.

“We also needed to create a consistent marketing message. There had been no consistent strategy or brand identity. Everything was localised. While that’s good — you want strong, focused localised marketing — you also need a unified brand message. The key is to be consistent and centralised.”

As these started to improve, there were economies of scale, which brought with them cost savings, service enhancements, banking benefits and gift vouchers. “We could do cost-effective group SMS campaigns, packaging, staff uniforms — these are all costs that add up,” explains Grant. “They’re also small brand touchpoints that don’t massively shift brand experience alone, but together create a consistent and recognisable brand experience.”

“Once you get everyone swimming in the same direction, you enter a safe haven,” adds John. “There’s comfort and support that a franchise brings its members. As a group we are far more powerful together, which is critical in this economy.”

“In a competitive market, the more leadership we can provide, the better,” says Grant. “Retail 20 years ago was simple: You just had to be a good retailer. Now you need a social media expert, legal experts, marketing — all of these are specialised services. It’s tough for a single store operator. Then, if you bought well and delivered good customer service, you did well. Now, there are so many complexities. You might be a good retailer, but you’ll still have gaps. A strong head office can fill these, either internally or with service providers, and costs and learnings are shared.

“There’s a lot of information that can be shared between franchisees through workshops and conferences. We also play a key role when it comes to third parties — landlords and suppliers are more accommodating and trusting of a store that’s part of a group.”

Fostering trust and transparency in your value chain

Trappers’ success has been based on trust and transparency throughout the value chain. “In the beginning, we gave more than we took,” says Grant. “Sometimes this was to our detriment, but it empowered our franchisees. We wouldn’t be where we are today if we hadn’t. We couldn’t afford to lose franchisees, and so we took our time building their trust. We listened to them, and slowly put what we needed in place.

“We ended up compromising a lot, but it was necessary. As we proved ourselves and earned our franchisees’ trust, we were able to put more wide-reaching systems and processes in place, working with their knowledge of their communities and shoppers. Our compromises cemented a culture of working together. We’ve centralised the business, and costs and efficiencies are streamlined, but we’ve also got an empowered group of franchisees.”

According to Grant, if a franchisor is providing more than franchisees are paying the franchisor, you’re in a good position. “If it reverses, that’s incredibly short-sighted — especially if you’re trying to maximise something in the short-term, to the detriment of your future relationships with your franchisees.

“At the end of the day, we won our franchisees over with an increasingly trusting relationship; this has been the critical success factor in our relationship with our franchisees.”

Refocusing on what matters

Alongside the franchising growth strategy was a retail strategy. From the beginning, Grant focused on building franchisee trust while shifting from a wholesale to a retail model.

When the business was acquired in 2003, it had no head office-owned stores. Under Grant and John, this has grown to ten head office stores and 24 franchised stores.

When Mark exited the business in 2012, John’s role was to focus on the growth and management of the retail side of the business, having come from a major corporate retail background. “This has always been an important element of the strategy,” explains Grant. “Head office stores are necessary for scale. You need both. Corporate stores allow you to influence the overall direction of the business, experience what your franchisees are experiencing daily, and they are revenue generators.

Finding the balance when dealing with franchisees

“You also need to secure products at competitive prices, and for this you need scale. We needed to expand corporate store space to strengthen our buying power, which was essential when we were winning the trust of our franchisees and proving the benefits of a strong franchise model.”

But there’s a balance too. “In this, as in everything else, transparency is key,” says John. “We don’t dictate to our franchisees. We encourage them to test products within predetermined boundaries, and we do the same in our corporate stores. When they test a product that works they let us know, and vice versa. Not all tests are successful. Retail is a mix of art and science. We don’t want to do anything that negatively impacts all 34 stores, which is why tests are important. This is a benefit of a franchise system — you can learn from each other.”

True to the Trappers ethos, the brand follows a mixed system of autonomy and franchisor support. “It’s not a cookie-cutter template,” explains Grant. “What works in Joburg’s northern suburbs doesn’t necessarily work in Upington. We cater to local communities.”

Slowly but surely, Trappers developed into a strong, successful franchise group, but another hurdle loomed. “In the early 2000s retail in South Africa was easy,” says Grant. “Our focus was on building the franchise, but the retailing side was slightly easier. Loads of trends (like hand held GPS units and wearables) were taking hold at the time, and with a lack of focus our range assortments and the company’s reliance on a few very successful brands became a concern.”

And then the world changed. The 2008 recession reached local shores, impacting retailers. “Some of these trends slowed down or dried up completely, and we realised that we needed to refocus. We had to ask: What are we not doing, that we were doing ten years ago?

The importance of brand heritage

As a business, Trappers needed to refocus on its original and core customer profile, understanding that a brand’s heritage is often imperative to its success.

“We had followed trends and forgotten our customer base, which left us exposed,” says Grant. “You need to know who your customer is, and focus on that niche first.

“We don’t follow competitors. We focus instead on the true Trappers customer. That’s our north star. Who is our customer and what do they want? That’s the question at the heart of our retail strategy, and we ask it daily. Our core customers don’t change, but their needs do, and so it’s important to stay abreast of those changes and check in with them; listen to them.”

“This requires communication between us and the franchisees. “The more we share about our customers, the stronger we are as a brand.”

Where to next?

Trappers is currently in eight of the nine provinces. “We initially focused on areas close to our base, but once we strengthened the franchise and corporate store base, we branched out,” says Grant.

“We’re now looking to grow in the Eastern and Western Cape, and as far afield as Namibia. We’ve consolidated our base. The next phase is to continue to identify geographical and financially sensible pockets of our market that we are not currently located in and place either a franchise or a company owned store in these areas that best satisfy our core customer needs.”

KEY INSIGHTS

Use strengths to your advantage

Every business has unique strengths — are you using yours? For Trappers, the entrepreneurial nature of its franchisees means store owners who really understand their local communities. Individual stores who cater to their communities isn’t the usual franchise model, but Trappers is making it work to their advantage.

Don’t lose your north star

Every brand needs a guiding principle and an ideal customer profile. If you lose sight of this, it’s easy for your products and services to stray away from your core. In today’s competitive environment, knowing your core is a key differentiator.

Compromises earn trust

Whether you’re working with clients, employees or franchisees, trust and transparency are the building blocks of a good relationship. Sometimes you have to give more than you get to build that trust, and prove that you’re willing to put the relationship and others needs ahead of your own.

How Strong Is Your Franchise’s Quality Control?

If you’re concerned about brand consistency as your footprint grows and you acquire more franchisees, listen up. While growth is good, keeping tabs on the quality franchisees are providing versus your company-owned locations’ efforts is difficult, but not impossible.

“There are, however, high-end franchise brands known for detailed attention to quality. Quality is not about what’s on the menu; it’s about consistency of the operation.”

Inconsistency ruins things

Many franchise brands risk failure by not establishing and maintaining quality for each outlet under the network’s guidelines. Regardless of whether a store is run by your company or a franchisee, if there’s glaring inconsistency in service and product quality between different locations, it’s likely to harm your brand’s reputation.

To establish the strength of your quality control standard, ask yourself the following questions:

1. Is your operational training procedure customisable?

Acquiring new franchisees is a chance to cement your training and quality processes and establish if these can be standardised, or if customisation is necessary.

“Training is equally as important as franchisee selection when it comes to maintaining the brand. The best franchisors routinely provide the most – and the most comprehensive – training to their franchisees,” says Siebert. “If standards aren’t rigorously enforced from day one, chances are these standards will continue to slip, and in the process, they’ll become more and more difficult to maintain.”

2. Have you provided the right tools in the franchisee manual?

Duplicating your franchise’s success relies heavily on mapping out the roadmap for your franchisees and their employees to follow. The right tools will most likely yield the same results you have achieved.

“Documenting systems of operation lend a big hand in a quality control,” says Siebert. “A robust manual has multi-fold benefits and not only serves as a blueprint for operation, but as an ongoing piece of reference for even the most established franchisee, becoming the default go-to in most every scenario.”

3. Do you understand the role of supporting each franchisee?

Whether you choose to conduct on-site field visits, offer master classes like Nando’s, or check in via email or phone monthly, the ultimate goal should be aiming for higher-quality and more profitable franchisees through ongoing support and reinforcement of brand standards.

Quality control is all about commitment. For a good franchisee, that commitment comes naturally. For the franchisor, it comes at a price. But franchisors who are willing to pay that price will find their ability to build a quality brand greatly enhanced,” says Siebert.

Could Semi-Absentee Franchise Ownership Be For You?

If you want to keep your current job while owning your own franchise, you may want to look into semi-absentee franchising.

“A semi-absentee model allows you to work on the franchise for ten to 15 hours per week while continuing full-time employment. Then when the time is right, you can exit your day job to focus entirely on your business,” explains Jim Judy, a consultant at Franchoice.

When you have a capable manager to oversee the daily operations of the business, you have the flexibility to work your full-time job and ownership of a fully-fledged business. But first, the following considerations need to be made:

How will the decision affect your finances?

While being a semi-absentee franchise owner may require less from you in terms of time, the financial commitment is the same as investing in a franchise as an owner-operator. The decision to become a semi-absentee franchisee should not be made before examining your needs, goals and expectations of the business. Asking yourself the following:

Do I want to become a franchise empire builder?

Would I like to build numerous concepts?

How much capital do I have to invest?

Keep in mind that semi-absentee models may take longer to turn a stable profit if you’re not giving it your full attention due to spending less time working on the business.

“Semi-absentee business models are also expensive,” says Heather Rosen, president of FranNet of Virginia, a franchise advisory firm. “Because the owner must not only rent the space but hire a competent manager.”

Do you have the necessary skillset?

The key to managing a franchise while at you have a full-time corporate job is having impeccable people management skills. This is because having a manager run your business while you oversee them requires you to be comfortable with delegating and trusting that they will handle the day-to-day operations of your business.

In addition to people skills, you may think certain talents are required before calling yourself a business owner, but each franchise is different.

“Some franchisees find that the available training and the business concept allows them to use their particular talents and skills to enter semi-absentee franchising without management or business ownership experience,” say experts at Franchise Direct.

Can you balance your schedule adequately?

Even if your plan is to one day leave your job and become an owner-operator of your franchise, while you’re still on your employer’s payroll, you will need to work out ways to handle your nine-to-five tasks with your business’ success. This is an important aspect of choosing the kind of franchise to purchase. While most semi-franchisee suitable options are in retail or the service industry, ensure you’re able to keep track of the business remotely and can periodically check in on how things are going.